How To Pay Off Debt With The Debt Avalanche Method
As we spoke before about how to pay off debt with the debt snowball method, I wanted to give you another method so that you can weigh up which one will work best for you when paying off your debt – it’s completely up to you which one you choose.
First things first, before we get into the debt avalanche strategy, we need to work on the steps that need to be set up before launching into everything.
The steps that I always recommend first are to track your spending and to create a budget. This may not sound like a lot of fun, but it’s not meant to be. It’s all about the numbers and figuring out where you can change certain things in order to meet your financial targets. If you don’t do this, it will be much harder to get yourself out of debt – so it is an exercise worth doing.
Track Your Spending
Look back at your bank statements, whether that be online or paper statements, and add up what you have been spending things on. If most months are the same, then just look at one month – but it may be worth looking back at a couple more months so that you can see a spending pattern.
Tracking your spending is not something to do to make you feel bad or to shame you, but to show you what you are working with. Studies show that when we guess how much we are spending on certain things, we tend to underestimate by a lot – not on purpose, but just because we aren’t fully aware how much the little things add up.
Create a Budget
I often find that it’s easy to dismiss needing a budget for reasons such as “It’s my money, I can spend it how I want”, ‘I work hard for my money”, “I can afford it”, “I know generally how much I’m spending” – and that’s fine, but if you find that you are not moving forward with your financial goals, this is where a budget will come in and help you.
Write down all of your incoming money, such as:
- Salary from your job (after tax, pension contribution etc)
- Benefits (child benefit, housing benefit etc)
- Rental income
List All of Your Expenses
This is where tracking your spending will come in handy, because as well as the normal bills, you can also create categories for the other things that you are spending money on, such as: eating lunch out, top up shops to go into the food shopping section, etc. Some examples of the typical expenses categories could be:
- Council Tax
- TV, Internet, phone
- Mobile phone
- TV Licence
- House/Contents Insurance
- Life Insurance
- Car insurance, tax
If you are just starting out with your budget, it’s important to categorise everything as much as you can – by this I don’t mean chucking everything under an ‘Entertainment’ category, but breaking down how much you spend on eating out at lunchtime, eating out at night, nights out, hobbies etc, separately. Putting it all together may make you feel better about the amount that you are spending, but it would help you improve on it.
Go onto your internet banking or gather up all of your paper bank statements and count up how much you have been spending. This will give you an accurate representation of where your money has been going, which can help you to work realistically on your budget.
There are various budgeting methods that can help you put your budget together, which I have discussed previously:
Once your budget is in place, you will be able to see how much you are able to spend on your debt. Another great thing about creating a budget is that you can clearly see the areas in which you can cut back – are you spending a huge amount on groceries that you are just throwing away?
Once you are ready to pay off your debt, you can choose the method in which to do so – there’s the debt snowball method that I’ve explained previously, or there is the debt avalanche method which I will be discussing below.
Debt Avalanche Method
This method says that you should pay off your debts in order of which has the highest interest rates. If you don’t know what the interest rates on your loans/cards are, have a look through the paperwork or give them a call to find out.
As you will know with interest, it keeps you stuck in a debt spiral because it’s hard to pay off the debt with the interest on top – especially if you have been stuck with something like a payday loan which are notorious for incredibly high interest rates.
Make a list of all of your debts in order of highest interest rate to lowest interest rates. This may look a little something like this completely made up example:
Car loan – £5000 – 20% interest
Credit card 1 – £4000 – 15% interest
Credit card 2 – £6000 – 10% interest
First of all, you need to check if you can get any of these interest rates reduced. There are a couple of ways that you can do this:
- Check if you are able to move any of your debt to a 0% card that has a long term on it. MSE are great for showing you the best 0% cards in order, their T&C’s and whether you are likely to be accepted for one. Please note, I would not usually advocate opening another line of credit – but in this instance, it is just to get rid of the interest you are paying off and potentially save you thousands of pounds.
- If you are unable to get a 0% balance transfer done, ring the bank/company that you have the debt with, and ask them to reduce the interest that you are paying. Say that you are aggressively paying off your debt and that if they do not reduce it, you will be moving the debt to another company that you have found with a lower interest rate (you could use one of the 0% balance transfers as an example if they ask you).
Mathematically speaking, this method is the best for wiping out your debt. You are getting rid of the high interest accounts so that you aren’t paying as much interest as if you left them. This method is excellent if you have a laser focus and work best this way. In contrast, the debt snowball method advocates that you first pay off the small amounts of debt, because it is better for you psychologically – once you see the debts getting wiped out, it keeps you motivated and on the debt payoff journey.
The debt avalanche method is the best way to pay off your debt mathematically, whilst the debt snowball method is the best way to pay off your debt psychologically.
Paying interest is no fun at all, because it does not contribute in any way to getting your debt paid off. It’s a nuisance payment and you need to get rid of it as soon as possible so that you are able to go full throttle at paying off the debt.
Whichever method you choose, is completely up to you. When it’s in black and white, the debt avalanche method makes the most mathematical sense, but we are not robots. You may need to choose the debt snowball method, or perhaps even a combination of the two depending on how the debt is looking – could you pay off the highest interest one first and then switch to the debt snowball method?
Remember, what worked for someone else may not necessarily work for you, and that’s ok. Use whichever method you prefer, and you can always change it during the process anyway – just keep plugging away at paying it all off and the rewards will be plentiful.
Could you use this method to pay off your debt?
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